STOCKS
Stocks have run up and bonds slaughtered partly in hopes of a quick Trump fiscal stimulus.
The 10-year note has gained for the last four days. Even though stocks have held mostly steady, risk has increased in stocks.
Now the ‘smart money’ is beginning to materialized that getting any fiscal stimulus plans through Congress would take a long time. The bond market is realizing this but the stock market is still oblivious.
GOLD AND RATES
As bonds rise, interest rates fall. Gold bulls are focused on lower interest rates. Gold is very sensitive to interest rates. On the flip side, bonds are rallying because hopes of inflation from Trump’s stimulus are fading. The first part of the move in this swing in gold was caused by rising inflation expectations. Now gold bulls are building on top of prior rising inflation expectations based on lower interest rate expectations which in turn are based on lower inflation expectations.
There is a contradiction here.
Gold simply cannot continue to hold gains that are built on rising inflation and lower interest rates at the same time, this is just not tenable over the medium-term. Hence there is high risk in gold at this level. This is the reason that the ‘smart money’ is inactive in gold.
Not withstanding the economic reasons described above, there is a bid under gold due to political risks perceived by some in Trump’s presidency.
YEN
Trump and Abe are meeting later this week. The outcome of the meeting will determine if the present retracement of gains by dollar against yen has run its course. If the dollar starts rising again, it will be good for Japanese stocks but bad for U. S. stocks.